Income-Based Repayment...is there a catch?

[Anonymous]

I am a current undergraduate student with approximately $17,000 in cumulative loans (Stafford Subsidized, Stafford Unsubsidized, and Perkins). Due to a disability, I have concerns about being able to maintain a job after graduation; I am currently taking a part-time courseload, and have had to drop classes/take a break from work at various points to address my health. I don’t know how my symptoms will progress over the next few years, and my big concern is the possibility that I won’t be able to work. As of now, I don’t receive any Social Security, though I intend to apply for it. From talking with people who share my condition, it can sometimes take many years to get approval (if benefits are approved at all), and I am very worried that I might not be able to pay ANYTHING toward my student loans. Of course, under IBR if I have very low-income or no income my payments would theoretically be $0 per month, but is there a limit on how many consecutive months you can “make a payment” of $0? If I am not able to work at all in my life (or am able to work, but drift from menial job to menial job because I can’t sustain employment due to my symptoms), what would end up happening to my loans? Would I have to go into deferral, forbearance, or bankruptcy, because my “payments” of $0 would after awhile stop counting as payments? I want to do everything I can to maintain employment, but I am very anxious about the possibility that my condition might progress. If everything gets forgiven, will I owe a massive amount of taxes at the end?

My biggest fear of all: what if Congress repeals the IBR program? Would I owe everything?

Thank you for any clarification you can provide.

[SCF]

I'll try to take this one question by question:

How long can you make IBR payments of $0?  Indefinitely as long as your income qualifies you for that payment level.  You do have to renew your IBR status each year though, so be sure to stay on top of that paperwork and in good contact with your loan servicers.  You may want to consolidate your loans if you have multiple servicers to make this easier.

What is the impact of making $0 IBR payments?  Interest will accrue on your loans, potentially increasing the amount you owe substantially depending on how long you do not make payments.  If you do not start making relatively substantial and consistent payments you may never pay off the accrued interest.  Your loans will be forgiven after 25 years if you still owe and having been making your required IBR payments.  Under current law, the amount forgiven is treated as taxable income.

Could Congress change the law?  Yes, they certainly could.  My guess would be that even if they do change the law, they would "grandfather" in borrowers who took out loans when the old rules applied.  This has been the standard with student loan legislation recently (for instance, PAYE did not apply to previous borrowers until the President issued an executive order requiring that everyone be able to access it, and that will still take until 2015 to implement).  BUT, there is always a risk when you sign up for a long-term forgiveness program that the laws could change in a way that doesn't favor your situation.

You're the only who can decide if you want to keep borrowing at this point based on what you know about yourself and your medical situation, but I would put a lot of thought into that decision.

[Anonymous]

Thank you so much for your response! This information was very helpful. To clarify, could you tell me when I will be responsible for the taxes resulting from the forgiven funds? For instance, let's say in 2018 I am scheduled to owe $2,000, but under IBR I pay nothing that year. Will I be taxed on the $2,000 that year, or at the end of my twenty-five year term? (Assuming an outstanding payment remains that is eligible for forgiveness?)

Accrued interest is eligible for forgiveness, correct?

Finally, will having all or part of a loan payment deferred (or forgiven) under IRB ruin my credit history? (E.g. do my non-payments still count as "payments," meaning my credit score won't be adversely impacted?)

[laz98]

---

@Anonymous wrote:
To clarify, could you tell me when I will be responsible for the taxes resulting from the forgiven funds? For instance, let's say in 2018 I am scheduled to owe $2,000, but under IBR I pay nothing that year. Will I be taxed on the $2,000 that year, or at the end of my twenty-five year term? (Assuming an outstanding payment remains that is eligible for forgiveness?)

---

Say you owe 10k now.  Suppose you pay $0 for the next 25 years, & your total balance owed balloons up to 20k (purely made up, no real match here).  Once your loans are forgiven, you will be taxed on that 25k.

[SCF]

The full amount that is forgiven will be reported as income in the year it is forgiven, which will be once you hit the 25 year mark.  The full balance - interest and principal is eligible for forgiveness once you do hit that 25 year mark.

As long as you keep your IBR status current and pay what you are directed, your loans will report "paid as agreed."  If your payments stay at $0, you'll only run into trouble if you fail to renew the IBR status each year.

[Anonymous]

So I can understand how much in taxes I could be looking at, could you give me a breakdown of what taxes will be assessed? Are state and local taxes included? I'm particularly concerned because I'm getting my degree from a university located in an area with a hefty city wage tax.  (Note, however, that I am not a resident of this community).  Is there any sort of online calculator I could use to get a sense of what I'd be taxed? At this point, I can only conjecture as to how much the principal will be/how much interest I would have accrued, but it would be helpful to have a vague idea of how many thousand I could be looking at. 

[SCF]

Honestly, there's so many factors that go into it, I'm not really sure how you'd get a reliable estimate this far out...

You'd need to know:

- Amount forgiven

- Tax bracket that you fall in for that year

- What the tax rate is on that bracket

- Whether your state and locality consider this type of income taxable (and it would most likely be based on your location when the loans are forgiven)

And that's assuming there are no changes in the law between now and then which affect your situation.  My plan in that situation would be to engage the services of a tax professional a few years out from the expected forgiveness to give you time to plan, because 22 years from now, you'll be able to to estimate most of those factors much more reliabily.

[Anonymous]

Doea anyone know the look back on filing single or joinly 

I was looking at the repayment estimater calc on the studentloan gov

and it it look like it would be in my best interest to file single, are they just looking at the previous year tax return

[laz98]

---

@Anonymous wrote:

Doea anyone know the look back on filing single or joinly 

I was looking at the repayment estimater calc on the studentloan gov

and it it look like it would be in my best interest to file single, are they just looking at the previous year tax return

---

When you first apply, you mean?  Just the last year.

[Anonymous]

When you first apply, I understand you have to fill out a  form every year ? do you have to show your filing status every year ?

 I am just trying to look at if it is best to file joinlty or single and balance at the end you have to claim the forgiven amount as income